will deflationary crash 2012

will deflationary crash 2012 : The forces of inflation are abating in the world economy with a credit contraction evident in the eurozone and imminent in China. Money printing is less and less effective at stimulating demand. This probably adds up to a severe deflationary shock next year with the British PM David Cameron warning his MPs that 2012 is likely to be the toughest year since the 1980s.

We wonder if he should not look further back to 1974 and the financial crisis after the 1973 oil shock. Then the financial markets dropped like a stone. That was the deflation. Then countries had no alternative but to print money and inflation soared. That was only brought under control by the Volcker Fed’s recession of the early 80s when the British PM was still a schoolboy.

1974 Crash
The 1974 financial crash was still being discussed a decade later. It ruined many individuals and financial companies particularly in London and New York. The stagflation of the late 70s made few people rich in the West though in the Oil States times were seldom better. Yet remarkably there are still a few bulls on Wall Street, though very few in London which is closer to the epicenter of the eurozone crisis. Viewed in splendid isolation the prospects in the US do not look too bad for the myopic who always fail to see the bigger picture.

The eurozone is tettering to the brink of disaster early in the New Year. It gets a step closer every day and the measures to prevent it are widely acknowledged as inadequate. That is why the British PM voted against it.

China is also not far behind. The great wall of debt that has powered the Chinese economy since the global economic crisis of three years ago is starting to crack up. House prices have begun to fall triggering a debt meltdown and US observers ought to know what that means next.

Bigger picture
This will certainly help to keep US bond yields low and bring down the cost of commodities for a while. But the wider disruption to financial markets and depression of foreign earnings for US multinationals will make this a far from painless experience.

ArabianMoney is just putting the finishing touches to our January newsletter with a more detailed consideration of the year ahead and what this scenario means for the Middle East. We think this will entail something like a repeat of the first half of 2009.

How to protect your finances in this awful economic environment is clearly a matter of some urgency and subscribers only will get the full picture. source www.albawaba.com

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